The uneven gains from globalisation have contributed to a backlash against the existing global trading system. Can it be reformed to serve the many and not just a few? Is it possible to rebuild faith in globalisation?
In a time of crisis and vast change, it’s helpful to turn to history – to return to the founders of economics and draw on their wisdom for what we should do.
The Greats are the economists like Adam Smith and David Ricardo. The Great Economists worked on general models while later ones tended to focus more narrowly. They crafted the models that help explain how an economy works and when it doesn’t work. For instance, Adam Smith’s ‘invisible hand’ showed us how demand and supply works to create markets back in the 18th century. In the early 19th century, David Ricardo explained why countries trade and what determines what they trade. Their ideas transformed the world, underpinning the Industrial Revolution that improved all of our lives.
Allow me illustrate by asking what the Great Economists would say about why globalisation doesn’t work for everyone.
We need to start with the premise of free trade. It is based on utilitarian principles. Utility is maximised for a society when the greatest happiness for the greatest number is achieved, so distributional consequences, i.e., who in particular in an economy benefitted mattered less. This sort of abstract thinking led the father of international trade, David Ricardo to be viewed as a theorist – which was not intended as a compliment in his day.
There’s even a term “Ricardian Vice” – to capture David Ricardo’s tendency to make ‘heroic assumptions’ about the world in a simplified manner that just did not reflect reality. The modern day version is the classic joke about economists. An economist would ask: “It works in practice, but does it work in theory?”
Today, some of the losers from globalisation are manufacturing workers. But, in Ricardo’s day, the losers were the landowners who lost the protection of the Corn Laws in 1846 that shielded British agriculture from competition after trade was opened up and such protectionist measures were repealed. Ricardo had the least charitable view of wealthy landowners, describing their ‘situation is never so prosperous, as when food is scarce and dear; whereas, all other persons are greatly benefited from procuring food cheaply.’ He went on to say: ‘I shall greatly regret that considerations for any particular class, are allowed to check the progress of the wealth and population of the country.’ Thus, there have always been winners and losers from international trade. Ricardo, and the classical economists, focused on the gains to the whole society which accrued as the economy grew more prosperous with trade. But, these uneven gains from globalisation have led to discontentment that needs to be addressed.
So, it fell to the great economist Paul Samuelson, who wrote in the middle of the 20th century and was the first American winner of the top prize in economics – the Nobel Prize, to further the work of David Ricardo. He examined the impact of globalisation on the income dynamics within countries that traded. His theory of factor price equalisation explains why wages in richer countries converge towards those of poorer ones in the sectors in which they trade. That is indeed what the evidence shows. US manufacturing wages have stagnated while those in China have risen towards American levels. Median real wages, which account for inflation, have stagnated for four decades in the US and two decades in countries such as Japan and Germany. In Britain and other advanced economies, low-end manufacturing has shrunk as a share of national output. In these rich economies, mid-skilled, manufacturing workers have “lost out” while skilled workers have done better.
But, globalisation is only one factor and not the most important one. Technology, specifically automation/robotics, is a much more important reason for stagnant wages. Robots and artificial intelligence play a much larger role in reducing demand for workers than trade. And technology is spreading beyond the factory floor to other parts of the economy. So, while wages are rising in places like China and thus placing less pressure on the West, automation’s influence is growing. Technology is transforming our workplaces, ranging from AI answering call centre phones to restaurants that are increasingly automated. The last McDonald’s I went to on the A303 had an entirely automated ordering and payment system. It is likely only a matter of time before robots grab your burger from the dispenser and place it on the counter.
What this means is that helping the losers from globalisation involves much more than reforming trade policy. If the world of work is changing, then people’s skills and education (their human capital) need to be geared at being flexible and prepared for an economy that will be disrupted by technology in unimaginable ways. The current policies that aim to “redistribute” incomes to help losers haven’t been enough, so new policies that “pre-distribute” and invest in people are likely needed. Right now, redistribution policies such as unemployment benefits support those who have lost their jobs. Pre-distribution could mean state-supported investment in roads or rail that could create new jobs in construction that is also mid-skilled and similar to the ones lost in manufacturing. And the infrastructure in a number of economies could use some investment that would also likely support economic growth. In other words, instead of redistributing monies after the fact to help those who have lost their jobs, focus on acting before there is a need to redistribute – such as by educating workers to prepare for a different economic future. It’s not easy of course. Workers have found it difficult to upgrade their skills from working with industrial machinery to learning computing. But, this digital age holds promise. I was speaking at the Bristol Festival of Economics when a couple of audience members in their 50s said they were learning to code!
So, the Great Economists would likely seek to remedy the downsides of international trade through domestic policies geared at better preparing individuals for a rapidly changing future. But none would advocate turning a country inward. At the heart of addressing the backlash against globalisation is to assess how each individual fares in society. The economy is simply the sum of the output of every person so it is evident that each individual matters and policymakers have an obligation to help those who are left behind by globalisation.
The challenge is to prompt policymakers to take action to do both: fashion appropriate policies to help the losers whilst also boosting trade that helps economic growth. In the words of Paul Samuelson, who was an advisor to US Presidents, “I have yet to meet a President who was over-burdened with a knowledge of economics.”
Although challenging, the attempt to craft more inclusive policies to ensure that globalisation benefits more people would be supported by the Great Economists who lived through the prosperous times that greater opening to the world economy have brought.
Paul Samuelson is considered the “last great general economist,” as described by The Economist magazine at the time of his death in 2009. Samuelson also worked on a range of other big economic questions, including how to fashion optimal economic policies. His argument was for policymakers to take the stance of an ethical observer. For instance, if you wanted to judge whether a policy such as building a new road was worthwhile, you might view it through an ethical lens. It’s a version of the 20th century American philosopher John Rawls’ “veil of ignorance.” If you stood behind a veil of ignorance, then you would not know if you would benefit from building that road or whether you were rich or poor, etc. So, you would judge that policy based on its merits, divorced from your personal interests. In this way, the best policies would be supported. Of course, that is easier said than done, which explains why too many good policies fail to be adopted.
Ever since Britain’s rejection of protectionism during the 19th century, its economy has flourished. The first industrialised country continues to punch above its weight in the world due to its international orientation.
But to make globalisation work for everyone, it must work for the many. That would be the insight gleaned from the Great Economists who have guided us through the Industrial Revolution to the golden age of economic growth after the Second World War to this current digital age. I have no doubt that their wisdom can help us find solutions to a better economic future – and help restore our faith in the global market system.
Written by Linda Yueh, author of The Great Economists: How Their Ideas Can Help Us Today who gave the 2018 BBC Free Thinking Lecture of the same title.